30 Day Investing Challenge, Day 24: Set Up Automatic Investments
The best way to build success is to remove barriers from the things you want more of in your life and add barriers to the things you want less of. For example: if you want to make a habit of going to the gym everyday, putting your gym clothes on the edge of your bed the night before removes the barrier of making the decision of what to wear the next morning. Conversely, to get people to smoke less New York City put in place a “sin tax” on cigarettes that made them incredibly expensive (the minimum price for a pack of 20 cigarettes is $13, but the average is about $20). Every 10% increase in cigarette prices reduces youth smoking by about 7%, so I’d call that a win.
This philosophy can be applied to your savings and investments as well. Having an automatic transfer into your savings account helps you build an emergency fund quicker than if you had to manually add that money every month. Even better: having your money deposited directly into savings when you get paid means you never even see it in your checking account. Your workplace retirement account does the same thing and automatically deducts the contribution from your paycheck so you never miss that money. This is why investing in your workplace retirement plan is so important — it allows you to easily automate wealth building.
Several years ago there was a study done on participation rates for workplace retirement plans. The question was: why do so many people not save in their workplace retirement accounts, even if they receive a substantial match? It turns out the barriers to entry were too high — new employees had to opt in to their plans; and because new hire onboarding can be overwhelming most people just forgot (I never do because I’ll be damned if I don’t get that match and tax break). So the researchers tried an experiment: instead of making employees opt in, they made them opt out instead. Meaning, when you join your employer you would have to choose not to contribute to your workplace retirement plan, rather than choose to contribute. This increased participation rates immensely: At one company the participation rate increased by 35% 3 months after adopting an “opt out” methodology and remained up 25% for 2 years afterwards.* This demonstrates how removing barriers really does help people adopt better habits and build wealth.
So you’ve got your workplace retirement set on autopilot, but what about the self directed accounts we discussed in yesterday’s challenge? To build off our investing momentum, let’s set up an automatic investment for the fund (or funds) you bought yesterday. In your brokerage firm’s portal you’ll find an option to set up automatic investments. This is not the same as automatic transfers. Auto transfers simply add more cash to your account. Automatic investments, however, allow you to set up a regular trade so you don’t have to manually buy every time you want to invest. I recommend setting up a monthly recurring investment that buys your favorite index fund or ETF.** You can start with a low amount and increase it when you feel more comfortable with investing.
Action Step: Set Up Automatic Investments
On your brokerage firms website, search for “automatic investment.”
From here you’ll follow the prompts to create a new automatic investment (below is an example of what Fidelity’s recurring investment form looks like).
Once you finish, sit back and relax while your money works for you!
This is Fidelity’s recurring investment form. As you can see it’s a very straight forward form and even allows you to link a bank account to make the automation even smoother.
I’ll see you back here tomorrow for your next challenge: utilizing the HSA “shoeboxing” strategy — this gets into a more advanced side of investing, so you’re in for a treat!
*Source: The Importance of Default Options for Retirement Savings Outcomes: Evidence from the United States
**A note about Vanguard: their portal doesn’t allow you to create automatic investments for their ETFs (Fidelity does), only their mutual funds (i.e. index funds).
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